Rationing, Spillover, and Interlinking in Credit Markets: The Case of Rural Punjab

A parallel market structure may exhibit extensive rationing in the regulated segment, and hence spillover of unsatisfied demand into the unregulated segment of the market. In the latter segment, the borrower can choose to bundle loan contracts with output marketing through the lender. Using data on Punjabi cultivators, econometric estimation of such a structure yields three principal findings: i most borrowers and non-borrowers were rationed in the regulated market; ii demand for credit was fairly inelastic with respect to the interest rate; iii a contractual provision tying credit to output marketing made informal lenders willing to advance much bigger loans. One pana and a quarter is the lawful rate of interest per month on one hundred panas, five panas for purposes of trade, ten panas for those going through forests, twenty panas for those going by sea. For one charging or making another charge a rate beyond that, the punishment shall be the lowest fine for violence, for witnesses, each one of them, half the fine. If, however, the King is unable to ensure protection, the Qudge) should take into consideration the usual practice among creditors and debtors. The Kautiliya Arthasastra (a fourth century BC work on kingship and statecraft).